IRS classifies removable partitions as five-year property

Plain-English summary

A business planned to install two types of interior non-load-bearing drywall partitions in owned and leased buildings. The IRS treated the removable zip-type partitions as tangible personal property in asset class 57.0, which generally carries a five-year recovery period under the general depreciation system. It treated the conventional drywall partitions as structural components and nonresidential real property under IRC § 168(e)(2)(B). The conclusions depended on the taxpayer's representations about how each partition was designed, removed, and used.

Ruling snapshot

• Question: How should removable and conventional drywall partitions be classified for depreciation?
• Outcome: Approved.
• Key authorities: IRC §§ 167, 168, 1245, and 1250; Rev. Proc. 87-56.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201404001 Third Party Communication: None
Release Date: 1/24/2014 Date of Communication: Not Applicable
Index Number: 168.20-00
Person To Contact:
------------------------------- ----------------------------, ID No. --------------
------------------------- -----------------
------------------------------------ Telephone Number:
----------------------
Refer Reply To:
CC:ITA:B07
PLR-110197-13
Date:
August 23, 2013

Re: Request for Private Letter Ruling for Asset Classification under Section 168

Legend

Taxpayer = -----------------------------------------------------------
City = ------------------------------
Date = ----------------------------
Year = -------
x = ----------
y = ----------

Dear ---------------------

   This letter responds to a letter dated February 27, 2013, and supplemental

information dated June 24, 2013, submitted by Taxpayer requesting a ruling regarding
the classification of certain interior, non-load bearing partitions for purposes of § 168 of
the Internal Revenue Code.

FACTS

     Taxpayer represents that the facts are as follows:

    Taxpayer is an individual that uses the cash method of accounting and files his

federal income tax returns on a calendar-year basis. Taxpayer’s business activities are
that of a wholesale, retail, and leasing distributor of lighting and construction related
products with associated administrative activities and professional engineering services,
and a lessor of building space and the use of certain improvements.

   Taxpayer plans to own a building with certain improvements containing

approximately x square feet located in City (the “Owned Property”). This building is a
rectangular two story facility with an entry lobby and central corridor in the middle of the
long side of the rectangular building. The central corridor runs from the front parking lot
PLR-110197-13 2

to the rear parking lot and connects an elevator tower on the front of the building with an
enclosed fire stair tower on the rear to the building. Two additional exit fire stairs occur
one at each end of the building along the short sides of the rectangle. Public restrooms
and mechanical rooms feed off the central corridor.

   Taxpayer anticipates initially occupying the Owned Property for use in its

business. Further, Taxpayer is contemplating leasing a portion of, or all of, the Owned
Property space with certain improvements to another party. Taxpayer anticipates to
lease the Owned Property to the general public.

    Further, Taxpayer leases from a third party approximately y square feet of space

in a building in City (the “Leased Property”). Taxpayer has plans in place to remodel the
Leased Property, including adding and paying for certain improvements. Taxpayer
anticipates initially occupying the Leased Property for use in its business. Further,
Taxpayer is contemplating sub-leasing all or a portion of Taxpayer’s Leased Property to
a sub-lessee. Taxpayer anticipates to sub-lease the Leased Property to the general
public.

   In completing the finish out of the Owned Property and in completing the

remodeling and finish out of the Leased Property, Taxpayer anticipates purchasing,
paying for, and depreciating two types of interior non-load bearing drywall partition
systems: (i) a zip type drywall partition system and (ii) a conventional drywall partition
system. Taxpayer will place in service both types of partition systems during the
taxable year ending Date (the Year taxable year).

     The zip type drywall partition system consists of the zip type partition elements

that include zip type drywall partitions (i.e., removable/reusable gypsum drywall panels
finished and painted), removable zip tape and joint compound, removable/reusable
studs and tracks, and removable/reusable screws, and the zip type partition
attachments that include removable/reusable panel coverings, removable/reusable base
and crown trim, removable/reusable integral door units, removable/reusable internal
utilities, removable/reusable integral glazing, and removable/reusable cabinets on the
zip type drywall partitions. The zip type partition uses a releasable adhesive on the zip
tape over the panel joint. Unlike other drywall joint tapes, a person can zip the zip tape
up without the tape breaking even after the joint compound has significantly cured.
When zipped up, the zip tape removes the joint compound that covers it and then
exposes the screws under the zip tape in a manner that allows screw removal and then
disassembly of the zip type partition for removal and re-use. A pull tab is on the zip
tape to alert remodel contractors that this joint tape is the type that can be zipped up for
disassembly of the partition.

   The zip type partition is designed and constructed to be movable. It can be

readily removed and can remain in substantially the same condition after removal as
before, or it can be moved and reused, stored, donated, or sold in its entirety. Removal
PLR-110197-13 3

of the zip type partition does not cause any substantial damage to the zip type partition
itself or to the building. Taxpayer anticipates that the zip type partitions may need to be
moved in order to accommodate the associated reconfigurations of the interior space
within the Owned Property and Leased Property.

   The conventional drywall partition system includes gypsum board partitions,

studs, joint tape, and covering joint compound. The joint tape cannot be removed
without breaking after the joint compound has had time to significantly cure. The
removal of the joint tape and a conventional drywall partition can be easily
accomplished only by demolition of the partitions. Disassembly or deconstruction of a
conventional drywall partition in a manner that provides for easy reuse is not practical
because the screws are beneath the non-removable joint tape and the covering joint
compound.

    The conventional drywall cannot be easily removed and cannot remain in

substantially the same condition after removal as before, or it cannot be moved and
reused, stored, donated, or sold in its entirety. Removal of the conventional drywall
partition causes substantial damage to the partition itself but does not cause substantial
damage to the building. Taxpayer anticipates installing conventional drywall partitions
within the Owned Property and Leased Property in locations not subject to expansion,
contraction, or reconfiguration.

   Taxpayer also represents the following:

    1. The zip type partitions to be placed in service during the Year taxable year are

not inherently permanent structures under the factors described in Whiteco Industries,
Inc. v. Commissioner, 65 T.C. 664, 672-673 (1975).

   2. The conventional drywall partitions to be placed in service during the Year

taxable year are inherently permanent structures under the factors described in Whiteco
Industries.

RULINGS REQUESTED

   Taxpayer requests the following rulings:

   1. Taxpayer’s zip type partitions installed within the Owned Property and Leased

Property are included in asset class 57.0, Distributive Trades and Services, of Rev.
Proc. 87-56, 1987-2 C.B. 674, as clarified and modified by Rev. Proc. 88-22, 1988-1
C.B. 785, for purposes of § 168.

  2. Taxpayer’s conventional drywall partitions installed within the Owned Property

and Leased Property are classified as nonresidential real property under § 168(e)(2)(B).
PLR-110197-13 4

LAW AND ANALYSIS

    Section 167(a) provides a depreciation allowance for the exhaustion, wear and

tear (including a reasonable allowance for obsolescence) of property used in a trade or
business or held for the production of income.

   The depreciation deduction provided by § 167(a) for tangible property placed in

service after 1986 generally is determined under § 168. This section describes two
methods of accounting for determining depreciation allowances: (1) the general
depreciation system in § 168(a); and (2) the alternative depreciation system in § 168(g).
Under either depreciation system, the depreciation deduction is computed by using a
prescribed depreciation method, recovery period, and convention.

   For purposes of § 168(a) or 168(g), the applicable recovery period is determined

by reference to class life or by statute. Section 168(i)(1) provides that the term “class
life” means the class life (if any) that would be applicable with respect to any property as
of January 1, 1986, under § 167(m) (determined without regard to § 167(m)(4) and as if
the taxpayer had made an election under § 167(m)) as in effect on the day before the
date of enactment of the Revenue Reconciliation Act of 1990. Prior to its revocation,
§ 167(m) provided that in the case of a taxpayer who elected the asset depreciation
range system of depreciation, the depreciation deduction was based on the class life
prescribed by the Secretary which reasonably reflects the anticipated useful life of that
class of property to the industry or other group.

    Section 1.167(a)-11(b)(4)(iii)(b) of the Income Tax Regulations sets out the rules

for asset classification under former § 167(m). Property is included in the asset
guideline class for the activity in which the property is primarily used. Property is
classified according to primary use even though the activity in which such property is
primarily used is insubstantial in relation to all the taxpayer’s activities.

   Section 1.167(a)-11(e)(3)(iii) provides that in the case of a lessor of property,

unless there is an asset guideline class in effect for lessors of such property, the asset
guideline class for such property shall be determined as if the property were owned by
the lessee. However, in the case of an asset guideline class based upon the type of
property (such as trucks or railroad cars) as distinguished from the activity in which
used, the property shall be classified without regard to the activity of the lessee.

   Rev. Proc. 87-56 sets forth the class lives of property subject to depreciation

under § 168. The revenue procedure establishes two broad categories of depreciable
assets: (1) asset classes 00.11 through 00.4 that consist of specific assets used in all
business activities; and (2) asset classes 01.1 through 80.0 that consist of assets used
in specific business activities. The same depreciable asset can be described in both an
asset category (that is, asset classes 00.11 through 00.4) and an activity category (that
is, asset classes 01.1 through 80.0), in which case the item is classified in the asset
PLR-110197-13 5

category. See Norwest Corporation & Subsidiaries v. Commissioner, 111 T.C. 105
(1998) (item described in both an asset and an activity category (furniture and fixtures)
is placed in the asset category).

   Asset class 57.0, Distributive Trades and Services, of Rev. Proc. 87-56 includes

assets used in wholesale and retail trade, and personal and professional services.
Asset class 57.0 also includes § 1245 assets used in marketing petroleum and
petroleum products. Assets in this class have a recovery period of 5 years for purposes
of § 168(a) and 9 years for purposes of § 168(g).

   Section 168(e)(2)(B) defines the term “nonresidential real property” as meaning

section 1250 property that is not residential rental property (as defined in §
168(e)(2)(A)), or property with a class life of less than 27.5 years. Nonresidential real
property has a recovery period of 39 years for purposes of § 168(a) and 40 years for
purposes of § 168(g).

  Section 168(i)(12) defines the terms “section 1245 property” and “section 1250

property” as having the meanings given such terms by §§ 1245(a)(3) and 1250(c),
respectively.

   Section 1245(a)(3) defines the term “section 1245 property” as meaning any

property that is or has been property of a character subject to the allowance for
depreciation provided in § 167 and is either personal property or certain other property
described within § 1245(a)(3)(B) through (F). See also § 1.1245-3(a). Section 1.1245-
3(b) defines “personal property” as meaning tangible personal property as defined in §
1.48-1(c) (relating to the definition of “section 38 property” for purposes of the
investment tax credit) and intangible personal property. Section 1.48-1(c) provides that
“tangible personal property” means any tangible property except land and
improvements thereto, such as buildings or other inherently structures (including items
that are structural components of such buildings or structures).

   Section 1250(c) defines the term “section 1250 property” as meaning any real

property (other than section 1245 property, as defined in § 1245(a)(3)) that is or has
been property of a character subject to the allowance for depreciation provided in § 167.
See also § 1.1250-1(e)(1). Section 1.1250-1(e)(3) defines “real property” as meaning
any property that is not personal property within the meaning of § 1.1245-3(b) and also
provides that section 1250 property includes, among other things, a building or its
structural components within the meaning of § 1.1245-3(c). Pursuant to § 1.1245-
3(c)(2), the terms “building” and “structural components” have the meanings assigned to
those terms in § 1.48-1(e).

  Section 1.48-1(e)(2) defines the term “structural components” as including

such parts of a building as walls, partitions, floors, and ceilings, as well as any
permanent coverings therefore such as paneling or tiling; windows and doors; . . .
PLR-110197-13 6

plumbing and plumbing fixtures, such as sinks and bathtubs; electric wiring and lighting
fixtures; . . . sprinkler systems; . . . and other components relating to the operation or
maintenance of a building.

  The Senate Finance Committee, in S. Rept. No. 95-1263 (1978), 1978-3 C.B.

321, 415, issued in connection with the enactment of the Revenue Act of 1978, Pub. L.
95-600, 92 Stat. 2767, stated the following:

In addition, the committee wishes to clarify present law by stating that tangible personal
property already eligible for the investment tax credit includes special lighting (including
lighting to illuminate the exterior of a building or store, but not lighting to illuminate
parking areas), false balconies and other exterior ornamentation that have no more than
an incidental relationship to the operation or maintenance of a building . . . Similarly, . . .
movable and removable partitions . . . are considered tangible personal and not
structural components. Consequently, under existing law, this property is already
eligible for the investment tax credit.

   Rev. Rul. 75-178, 1975-1 C.B. 9, provides that the classification of property, such

as movable partitions, as “personal” or “inherently permanent” should be made on the
basis of the manner of attachment to the land or the structure and how permanently the
property is designed to remain in place. This determination of permanency of the
property, that is, whether the property in question is inherently permanent, is made by
applying the factors set forth in Whiteco Industries, Inc. v. Commissioner, 65 T.C. 664,
672-673 (1975), acq., 1980-1 C.B. 1. No one factor is decisive. See JFM, Inc. and
Subsidiaries v. Commissioner, T.C. Memo. 1994-239.

    The Whiteco factors are: (1) Is the property capable of being moved, and has it

in fact been moved? (2) Is the property designed or constructed to remain permanently
in place? (3) Are there circumstances that tend to show the expected or intended length
of affixation, that is, are there circumstances that show the property may or will have to
be moved? (4) How substantial a job is removal of the property, and how time-
consuming is it? (5) How much damage will the property sustain upon its removal? (6)
What is the manner of affixation of the property to the land?

   The depreciation classification of Taxpayer’s zip type partitions and conventional

drywall partitions depends on whether the partitions are inherently permanent
structures. This determination is made by the application of the Whiteco factors.

Zip type partitions

   Taxpayer represents that the zip type partitions to be placed in service during the

Year taxable year are not inherently permanent structures under the factors described
in Whiteco Industries. This representation is a material representation. Based solely on
PLR-110197-13 7

this representation, we conclude that the zip type partitions are tangible personal
property for depreciation purposes.

   During the Year taxable year, Taxpayer will place in service zip type partitions in

buildings comprising the Owned Property and the Leased Property. Taxpayer
anticipates initially occupying the entire Owned Property and Leased Property for use in
its business. Taxpayer represents that its business activity is that of a wholesale, retail,
and leasing distributor of lighting and construction related products with associated
administrative activities and professional engineering services. Asset class 57.0
includes these business activities. Accordingly, the zip type partitions in the Owned
Property and Leased Property are includible in asset class 57.0 when Taxpayer
occupies the Owned Property and Leased Property for use in its business activity.

    However, Taxpayer is contemplating leasing a portion of, or all of, the Owned

Property space to another party. Further, Taxpayer is contemplating sub-leasing all or a
portion of Taxpayer’s Leased Property to a sub-lessee. Accordingly, the depreciation
classification of the zip type partitions when used by the lessee(s) of the Owned
Property or the sub-lessee(s) of the Leased Property depends upon the business
activity of such lessee(s) or sub-lessee(s). See § 1.167(a)-11(e)(3)(iii).

    Taxpayer anticipates to lease the Owned Property and to sub-lease the Leased

Property to the general public. The business activity of leasing space in buildings to
the general public is described in asset class 57.0 of Rev. Proc. 87-56. Accordingly, the
zip type partitions in the Owned Property and Leased Property are includible in asset
class 57.0 when Taxpayer leases the Owned Property and sub-leases the Leased
Property to the general public.

Conventional drywall partitions

   Taxpayer represents that the conventional drywall partitions to be placed in

service during the Year taxable year are inherently permanent structures under the
factors described in Whiteco Industries. This representation is a material
representation. Based solely on this representation, we conclude that the conventional
drywall partitions are structural components of the buildings comprising the Owned
Property and Leased Property and, therefore, are classified as nonresidential real
property under § 168(e)(2)(B).

CONCLUSIONS

   Based solely on the facts and representations submitted, we conclude that:

  1. Taxpayer’s zip type partitions installed within the Owned Property and Leased

Property are included in asset class 57.0 of Rev. Proc. 87-56 for purposes of § 168.
PLR-110197-13 8

  2. Taxpayer’s conventional drywall partitions installed within the Owned Property

and Leased Property are classified as nonresidential real property under § 168(e)(2)(B).

  The rulings contained in this letter are based upon information and

representations submitted by Taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

    Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter under any other provisions of the Code. Moreover, no opinion is
expressed or implied as to: (i) whether Taxpayer’s zip type partitions are not inherently
permanent structures under the factors described in Whiteco Industries Inc.; (ii) whether
Taxpayer’s conventional drywall partitions are inherently permanent structures under
the factors described in Whiteco Industries Inc.; (iii) whether Taxpayer has a
depreciable interest in the zip type partitions or the conventional drywall partitions; or
(iv) the proper asset class in Rev. Proc. 87-56 for the zip type partitions if Taxpayer
leases the Owned Property or sub-leases the Leased Property to persons engaged
primarily in one business activity.

  This letter ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

  In accordance with the power of attorney on file with this office, we are sending a

copy of this letter ruling to Taxpayer’s authorized representative. We also are sending a
copy of this letter ruling to the appropriate operating division director.

                                  Sincerely,

                                  Kathleen Reed

                                  Kathleen Reed
                                  Branch Chief, Branch 7
                                  Office of Associate Chief Counsel
                                  (Income Tax & Accounting)

Enclosures (2):
copy of this letter
copy of section 6110 purposes